Getting the economy back on track

By Nimesh Shah
Managing Director & CEO
July 14, 2014
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The Indian economy is on the cusp of bouncing back from the crunching slowdown of the past few years, which offers an opportunity for long-term investors.

With many comprehensive measures announced in the budget to spur economic growth, the finance minister has walked the tightrope of managing fiscal prudence and getting economic growth back on track.

By assuring the markets of more clarity on tax-laws and portfolios inflows, and raising allocations to the infrastructure segments that need it the most such as roads, the Budget has laid the ground work necessary to spur the economy. It’s a well-balanced budget given the challenges of a slowing economy, weak monsoons and rising oil prices internationally.

It’s also reassuring to note that the Budget has no unpleasant surprises, which only tends to unnerve investors and companies more than anything else. In fact, the budget has tried to alleviate many concerns relating to investments in India and has reassured that stable tax regime will be the key to policy decision making in the future.

Fiscally, there was the big challenge of maintaining the fiscal deficit target of 4.1 percent of GDP this year, which was laid down in the interim Budget. It’s heartening to see that the Budget has maintained the target at 4.1 percent, which is healthy sign that the government is keen on keeping expenditures in check, and maintain fiscal prudence.

Having said that, given that we have been seeing a slowing economic activity so far, the assumptions behind the 4.1 percent fiscal deficit number appears to be a little stretched.

In what I would like to term as big `power positive’ for the economy and market is that the Budget has gone some distance in making cheaper funding available to infrastructure. By doing away with SLR (Statutory Liquidity Ratio) and CRR(Cash Reserve Ratio) requirements for long-term infrastructure investments, the Budget has clearly benefited many PSU (Public Sector Undertaking) banks, which have been big lenders in the infrastructure segment. On the other hand, it will ensure that infrastructure funding becomes cheaper as the benefits of the reduction in costs will get passed on.

Another reassuring move is to put more money in the hands of the people. The tax concessions given to the middle-class will go some way in alleviating inflation pressures. At the same time, by raising limits for investment in tax saving instruments, the Budget can help channelise money into financial instruments such as equity and debt. This can help investors shift towards financial savings away from real estate and gold.

Debt funds still offer a good opportunity with interest rates at higher levels. If the monsoon picks up pace, interest rates could come down much earlier offering gains for investors.

Equities, however, are not cheap now with most sectors in the fairly valued zone, barring the consumer sector which looks overvalued.

With the economy bound to recover sooner or later, we believe equities make a case as the compounding asset class.